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Read more about Professional Indemnity Insurance Definition
What types of businesses need professional indemnity insurance?
The simple answer is any business that offers professional or specialised services. People aren't coming to you simply to buy a notepad or a garden hose. They rely on your expertise to help them make big decisions or to help them make big changes.
You might be a nutritionist who helps people get their health on track or a financial advisor whose advice convinces wealthy clients to invest considerable sums.
As a result, you open yourself up to a host of unique risks that the person selling garden hoses doesn't face.
People aren't coming to you simply to buy a notepad or a garden hose. They rely on your expertise to help them make big decisions or to help them make big changes.
Do you perform any of these activities?
If you partake in any of the following activities, you're probably the type of business that needs professional indemnity insurance:
You consult. If someone takes your advice and it harms them, they can sue you. It doesn't matter if you're a lawyer, a dietician or an advertiser.
You offer professional services. If a simple slip-up on your part could spell disaster for your client, it could keep your lawyer occupied for a long time. For example, you may be an IT contractor who overlooks a seemingly small security vulnerability or a surveyor who makes a slight miscalculation regarding property boundaries.
You treat people (or animals). If you're a dietician who prescribes herbal remedies, a physio who manipulates bodies or a vet who treats furry friends, you're most likely helping people in the vast majority of cases. But if something goes wrong, it could go very wrong.
You use hazardous materials. You probably already know that you can't be too safe with hazardous materials like insecticides. There's a reason for that: they can really hurt people. Letting your guard down even once could be devastating to your clients and your business.
Professions where indemnity cover makes sense
Here is a list of professions that are well suited for professional indemnity insurance. It's not an exhaustive list, so speak to an insurer about whether you need this type of protection for your business.
Professional indemnity insurance makes sense for the following professions:
This is by no means an exhaustive list, so speak to an insurance consultant to see if you need this type of cover.
Why is professional indemnity insurance so important?
There haven't historically been too many ways a small business owner could inflict damage on a customer. Maybe someone would slip and fall on your premises and you'd be responsible for the medical bills.
But things have changed. In today's information economy, a freelance accountant could make an error that could cost a client millions. A Botox clinic could botch an injection, causing the customer years of physical and emotional trauma.
Situations like these aren't as cut and dried as accidents, making it more difficult for insurers to assess their risk. It's also easier for customers to sue you over any perceived damage, be it physical, monetary or emotional.
What kind of protection does professional indemnity insurance provide?
Here is what most policies will generally reimburse you for, as long as it's within your benefit limits and as long as you don't violate the terms of your policy:
You're sued. You'll be covered for the cost of defending yourself.
You owe money as a result of the suit. You'll be covered for any amount you owe the person suing you.
You hire someone to help you prepare your claim. Professional indemnity payouts can involve massive amounts of money and require you to submit detailed evidence of loss. You'll be reimbursed if you need to hire someone to help you prepare your claim.
You miss work because you attended court. You'll be compensated if you or any of your employees are required to attend court as a witness.
The government fines you. You can get compensation for any civil fines you face as a result of your professional services.
One of your contractors causes the suit. It can protect you if the claim against you arises from the work of a consultant, agent or other contractor you've hired.
You lose a client's important documents. Your policy can pay the replacement costs of any documents you are legally responsible for and have lost.
You need to hire someone to clear your reputation. You can be reimbursed for public relations expenses used to protect your image in the face of the claim made against you.
Is professional indemnity insurance the same as public liability and product liability insurance?
These three insurance subtypes are easy to get confused. After all, protecting you from third-party claims involving personal injury and property damage is a major aspect of both. The difference lies in how these injuries/damages occurred.
This type of protection kicks into gear when the damage occurs as a result of faulty professional service. This damage can be physical injury, property damage, monetary losses and even emotional trauma.
Example: As a salon owner, you're dyeing someone's hair and you spill some dye into the person's eye.
This type of protection kicks into gear when the damage is completely unrelated to your professional service, or if it is an unfortunate effect of a professional service performed correctly. This would usually be limited to personal injury or property damage.
Example: As a salon owner, you're dyeing someone's hair and their scalp reacts negatively to it in a way no one could anticipate.
This is a subset of public liability insurance, and it kicks into gear when the damage occurs as a result of a product you've sold.
Example: As a salon owner, you sell someone some hair dye that damages their skin after they've taken it home and applied it themselves.
While there are some fringe cases that don't fit neatly into any one of these specific buckets, insurers try their best to word their policies so that professional indemnity, public liability and product liability protection each protect you from a completely distinct set of circumstances. That means that you can't get away with only purchasing one and hoping it will cover you across the board.
But not all professional service providers are exposed to the types of risks covered by public or product liability insurance. In that case, you may be able to ditch them. If you don't sell products in a retail capacity, you obviously wouldn't need product liability insurance. If you're a digital consultant and your business doesn't have a physical location, you are unlikely to injure someone or damage their property. It might be safe to drop the public and product liability and opt for professional indemnity insurance only. Just don't do anything hasty. Consider your situation carefully and speak to an insurer if you're uncertain about what you need.
How a professional indemnity insurance claim works
1) The claim from the third party must happen while your policy is active
In most cases the crucial date to take note of is when a third party files their claim against you. This must occur while your policy is active.
2) This means you can be covered for incidents before your policy is active
As long as the actual claim is made while your policy is active, you are protected. The following examples show when you are and aren't covered:
Covered: You take out a policy in February 2019 and someone files a claim after that date for an incident that happened in 2018.
Not covered: You take out a policy in February 2019 but someone already filed a claim before that date.
3) Retroactive date
Insurers understand that a long time can pass between the time you cause damage to someone and the time they make their claim against you, and this doesn't fit neatly into a one-year policy period. To account for this, many insurers will assign a retroactive date that is usually a date prior to the start of your policy. You'll be covered for any incidents that occurred from this date as long as the third-party claim is made while your policy is still active.
1) You need to be upfront.
You must tell your insurer about any prior incidents that occurred after your retroactive date and that you reasonably expect could lead to a third-party claim or else you'll be denied. Some insurers offer continuous cover that won't penalise you for not disclosing prior incidents, but only if you held a similar policy with them when the incident occurred and if you have continuously held policies with them ever since.
2) You shouldn't cancel too early.
You're not protected if you cancel your policy before the third-party claim is filed, even if you originally caused the damage during your active policy period. Some insurers offer an extended notification period that will allow you to make an insurance claim for a short period of time after your policy ends.
Understanding the two types of claims
The word "claim" is used in two different ways in the context of professional indemnity insurance.
Third-party claim. This is when a third party sues you for damages you caused them.
Insurance claim. This is when you request that your insurer reimburse you for losses due to the third-party claim.
What types of third-party claims are covered by a professional indemnity policy?
A wide range of incidents and events can result in a third-party claim and the nature of these events dictate whether your insurance claim is valid. The following events are typically considered to be valid reasons for submitting an insurance claim, if they've resulted in damage to the third party:
Fair-trading violations. You've violated fair-trading or consumer protection laws.
Contractual violations. You've violated terms of your contract.
Lost documents. You've lost a client's crucial documents and/or data.
Employee dishonesty. One of your employees was dishonest, committed a crime or acted maliciously.
Professional indemnity insurance frequently asked questions
Claims can be made up to 15 years after the original damages, depending on the industry. That means you may still be vulnerable after you've moved on from your business. Some insurers offer a special type of professional indemnity insurance called run-off cover that will protect you for claims only related to past incidents (and not future activities). Whether you need this, and how long you'll need it, is entirely dependent upon your individual risk factors, so your best bet is to talk to a broker.
Employees are typically covered under their employer's professional indemnity insurance for claims related to the employer's business. If the employee decides to undertake work that is independent of their employer, they will need to take out their own policy for that work. For example, an architect who undertakes work independently of their architecture firm will need their own policy. Similarly, an architect who works for a non-architecture business will need a separate policy to their employer, whether they purchase it themselves or their employer does.
Most insurers will deny your insurance claim if damage to the third party was the result of criminal activity. However, in some cases, your claim will be valid if the crime was committed by an employee other than you or one of the directors.
Professional indemnity premiums are generally tax-deductible because in most cases they represent a business expense that directly affects your ability to earn money. It's probably a good idea to chat with a tax professional if you have any concerns about how these deductions are treated.
Most insurers will cover you for damages related to misleading and deceptive conduct, but only if it was unintentional. This is usually covered under the fair-trading violations section of your policy. In some cases, intentional misconduct will be covered if it was done by one of your employees (other than you or one of the directors).
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